By Tiernan Ray

Servers and networking were a bright spot in the quarter, rising by 11% in the case of networking equipment, while PCs and storage equipment fell by double digits on a percentage basis.

There are no outright ratings changes today, but estimates are generally coming down and there have been some cuts to price targets here and there. Most bears, and the bears have the high ground with the stock at the moment, fear anything positive at Dell will be offset by the continued erosion of the PC market.

Brian White, Topeka Capital Markets: Reiterates a Buy rating, while cutting his price target from $14.75 to $13.50. “Given the challenging tech results over the past month, the growing macro fears and the weakening trends in the PC market, Dell’s results and outlook had the potential to be much worse than reported. Additionally, we believe Dell’s profit cycle (YoY operating profit growth) bottomed out in 3QFY13. Given the stock is currently trading at just 3.4x (ex-cash) our CY13 EPS estimate and sporting a 3.3% dividend yield, we believe the stock has limited downside from current levels as we expect value investors will be attracted to the stock. With this type of valuation, we believe Dell needs to start thinking BIG about enhancing shareholder value or someone else may beat them to the punch […] Recall, Dell has targeted the return of 20-35% of free cash flow to shareholders each year and thus investors are concerned that there will be no further buy back in 4QFY13. With Dell trading at just 3.4x (ex-cash on our CY13 EPS), we believe the Company needs to think much bigger and repurchase its stock aggressively at current levels.” White cut his 2014 estimates to $55.986 billion and $1.83 from a prior $56.81 and $1.92.

Maynard Um, Wells Fargo: Reiterates a Market Perform rating and a $10 to $11 “valuation range.” “Net net, Dell managed through a difficult quarter and while we still think Dell has the ability to transition into more of a solutions company over time, the concern over its PC exposure and decline given end market weakness is likely to weigh on its multiple. PC weakness largely in line with our recently lowered ests (PC revenues down $1.5B yr/yr, total revenues down $1.6B). Dell noted industry inventory remained high in Q3 due to weak demand ahead of Win8 launch. However, the company noted early Win8 touch portfolio feedback from commercial customers is favorable, specifically noting the Latitude 10. Dell also mentioned a slowdown in the corporate refresh and expects a pick up heading into 2013 […] Storage, servers and networking below ests. Storage revenues missed relative to our expectation (-16% yr/yr) as did servers and networking (+11% yr/yr–12th consecutive quarter of growth), though Dell gained share from being early to market with its new 12G servers.” Um cut his 2014 estimates to $57.35 billion in revenue and $1.65 from a prior $59.57 billion and $1.74.

Brent Bracelin, Pacific Crest: Reiterates a Sector Perform rating, and basically offers up a boilerplate statement of Dell’s problems: “Despite strong recent performance, we believe the benefits of improved operational efficiency and a corporate refresh cycle are offset by high risks associated with increased foreign competition, the transition to mobile Internet devices, lengthening PC replacement cycles, concentrated IT purchasing, fiscal budge- tary constraints and renewed competition from key competitors.” He sees the shares trading in the $8 to $9.50 range.

Richard Kugele, Needham & Co.: Reiterates a Hold rating, calling this quarter’s outlook “anemic” and the trend one of “ho-ho-hum seasonality.” “Dell continues to hold its own in the current macro environment, as its enterprise business advances only partially compensate for the headwinds within the broader PC landscape. While the company has executed far better than some of its large peers, we see little reason to be involved in the name until the demand situation stabilizes despite the obvious positives of a high net cash balance, dividend, and more flexible balance sheet.” Kugele cut his 2014 projection to $57.45 billion and $1.74 per share from a prior $58.26 billion and $1.76 per share.

Keith Bachman, BMO Capital Markets: Reiterates a Market Perform rating, and cuts hs price target to $11 from $14, titling his report simply “Not Enough PCs.” “Given the weakness in the PC market and Dell’s ongoing share loss, we have difficulty constructing a bullish scenario for the shares. We think Dell is engaging in the right long-term strategy of buying enterprise revs, and diluting its PC business, but such a strategy will take a long time to result in PC’s moving meaningfully lower as a percentage of revs from the current 50% level […] We think that Dell’s gross margins trend is positive as the higher-margin software and services business contributes a larger share of the total revenues. We note that weaker client business also helps overall gross margins. Net, we think that Dell is probably targeting the right segments in the enterprise spending by focusing on more solutions based approach which includes bundled hardware, software and services. That said, we note that weaker macro environment and challenging demand environment in government business would require Dell to execute better in CY2013 to maintain its improving GM trends and overall profitability.”

Jim Suva, Citigroup: Reiterates a Sell rating and an $8.50 price target, writing that Dell’s problem is not the economy but the market for PCs: “While Dell cites the bad economy as the cause of the company’s challenges, we believe the real issue is the new BYOD (Bring Your Own Device) trend which is eroding Dell’s core and traditional strength, and we see BYOD as a major headwind to traditional PC vendors (DELL and Hewlett-Packard (HPQ) both Sell rated).” Suva raised his 2014 revenue estimate to $55.54 billion, while cutting his EPS estimate to $1.53 from $1.58.

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There are 2 comments

NOVEMBER 16, 2012 1:55 P.M.

techy46 wrote:

The PC sector just finished the Windows 7 refresh cycle and will not start the Windows 8 refresh cycle in earnest until the overall economic climate (EU, Fiscal cliff, etc.) improves in Q1 2013. Windows 8 will drive most PC sales then most expect once the FUD is cleared up and everyone recognizes all the positives.

NOVEMBER 16, 2012 2:11 P.M.

Jay wrote:

I agree with Brian White. I was surprise that they brought in that great number after so many companies warned about the global slow down. They will do well in 2013 because many people and companies will upgrade to Windows 8. Also they are positioned to go after enterprise.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.